Thursday, 1 June 2017

Institutional Investors Answer the Growing Call for Increased Social Responsibility, But Is It Enough?

Today’s post looks at the news that a number of extremely
large institutional investors have joined forces to call for action to be taken
against the tobacco companies, all for the good of societal health. For this
post, the focus will be on that particular call, but also on the development of
institutional investors championing social causes on the back of a concerted
call from their members, together with the relative success of investors and
large firms that fully commit to that ideal. However, it is important to assess
whether this move by the industry is genuine, or simply a reaction to societal
pressure which, in turn, shields the investors and the financial sector
moreover from criticism.

In April of this year, it was reported that four major
institutional investors – Axa, CalPERS, Scor, and AMP Capital – were calling on
their fellow investors to publicly back efforts to divest from the tobacco
sector, stating that they wanted other investors to join them in supporting ‘global
action against the tobacco epidemic and its significant cost to society and development’.
Axa’s Head of Corporate Responsibility, Alice Steenland, was quoted by the Financial Times as saying that ‘there is
real momentum’ in this move to divest, and more recent news seems to
confirm this momentum Steenland talks about. Since the four investors tried to
rally support for the pledge, ‘more
than 50 companies managing $3.8 trillion of money… declared support for “tobacco
control measures”’, which has subsequently led to the consortium of
anti-tobacco proponents pressurising the fund managers of UK Local Authority
staff, which The Guardian suggests
still own at least £1 billion in tobacco stock – 28 Local Governments are
registered as owning stakes totalling over £700 million in British American
Tobacco (BAT) alone. The article in The Guardian discusses how one of the
obstacles facing the fund managers is that they are legally obliged to
prioritise the maximisation of investment above
anything else, which rules out divesting on societal health grounds – in reality,
the mass withdrawal from the sector will harm that aim of maximising anyway.
Yet, the heads of the leading investors are adamant; ‘action
must be taken to combat the enormous human costs of tobacco’.

The sentiment offered by the leading investors, one that
looks to include a serious consideration of external factors in the decision
making process of fund managers, is just one component of a growing wave of
socially-responsible finance. Currently, Shell’s shareholders are in the
process of voting
as to whether to enforce new climate change goals upon its management, and
Exxon Mobile’s shareholders have just undertaken an ‘historic’
vote to enforce their management to declare how the company’s business impacts
the environment. With regards to the vote at Exxon, one of the leading
proponents of change was the ‘Church Commissioners’ group that manage nearly £8
billion of the Church of England’s assets and who recently recorded headline-grabbing
profits by following this ideal of responsible and sustainable investment. This
is in addition to the development this year of the failed takeover attempt of
Unilever, which as discussed
earlier in Financial Regulation
Matters, brought the notion of responsible business versus predatory
business to the fore. Yet, as is always preached here in Financial Regulation Matters, we must remain inquisitive and
pessimistic at all times – history dictates it.

With that in mind, we must ask whether the recent media
attention given to these issues is forcing through a phase that will pass once
the economic malaise of the Financial Crisis truly departs from memory. The
question of whether this recent movement towards sustainable and responsible
finance is purely reactionary, or whether it is a movement that is here to
stay, is a very important question indeed. On the one hand, investors must be
applauded for seeking to divest their stock in companies that negatively affect
societal health i.e. tobacco companies, but by the same token should they
divest their investments within the alcohol industry also? Or, on a much
grander scale, should they divest their positions within leading financial
institutions like Goldman Sachs, RBS, and the many other institutions that
brought the world to its knees in 2007/8? Yes they must be applauded, but the
breadth of their intention must also be scrutinised. Whilst it is appealing and
comforting to suggest that this is not a phase, but the ‘new normal’ when it
comes to institutional investment patterns, there is no evidence to suggest
that is the case – in order to maximise returns for clients, fund managers must
move with (and preferably for them ahead) of the economic cycles, which suggests
that attaching oneself to an ideal in finance is not possible; they have
already attached themselves to an ideal that has worked for them for an awfully
long time – maximise profit at all costs. A cynical take would be that this
movement towards responsible finance provides the fund managers with plenty of
reputational capital with which they can seek to take increased risks the next
time the carnival comes to town; let us hope that this cynical viewpoint is
not, in reality, the correct viewpoint.

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